Cement Marketing Co. Of India Ltd. v. Assistant Commissioner Of Sales Tax, Indore And Others, Supreme Court Of India, Judgment, Law, casemine.com

Factual and Procedural Background

The assessee, a cement dealer, conducted sales of cement governed by the Cement Control Order during two assessment periods: (i) August 1, 1971 – July 31, 1972 and (ii) November 15, 1971 – July 31, 1972. The sales were on a “free-on-rail destination railway station” basis. Although the cement price notified under the Control Order included freight, the purchasers actually paid the freight and deducted that sum from the invoice price.

During assessments under the Madhya Pradesh General Sales Tax Act, 1958 (MPGST) and the Central Sales Tax Act, 1956 (CST), the Assistant Commissioner held that freight formed part of the “sale price,” added it to the taxable turnover, levied tax accordingly, and imposed heavy penalties for the assessee’s failure to disclose freight figures in its returns. Because the legal issue concerning freight inclusion was already pending before the Supreme Court in another matter, the assessee obtained special-leave and appealed directly to the Supreme Court challenging both the tax inclusion and the penalties.

Legal Issues Presented

Whether the freight component contained in the Control-Order price forms part of the “sale price” and is therefore includible in the taxable turnover under the MPGST Act, 1958 and the CST Act, 1956.

Whether penalties imposed under Section 43 of the MPGST Act, 1958 and Section 9(2) of the CST Act, 1956 were legally sustainable when the assessee excluded freight from its returns under a bona fide belief that it was not taxable.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Hindustan Sugar Mills v. State of Rajasthan & Ors. (1978) 4 SCC 271; (1979) 1 SCR 276	Freight included in a Control-Order price forms part of “sale price” under identical statutory definitions.	Adopted as binding authority to hold that freight is part of “sale price” under both the MPGST and CST Acts.
Hindustan Steel Ltd. v. State of Orissa (1969) 2 SCC 627; (1970) 1 SCR 763; 25 STC 211	Penalty provisions, being penal in nature, require a “guilty mind”; technical or bona fide breaches should not attract penalty even where minimum penalty is prescribed.	Relied upon to set aside penalties; the Court found the assessee’s exclusion of freight was bona fide and therefore not a “false” return.

Precedent

Rule or Principle Cited For

Application by the Court

Hindustan Sugar Mills v. State of Rajasthan & Ors.
(1978) 4 SCC 271; (1979) 1 SCR 276

Freight included in a Control-Order price forms part of “sale price” under identical statutory definitions.

Adopted as binding authority to hold that freight is part of “sale price” under both the MPGST and CST Acts.

Hindustan Steel Ltd. v. State of Orissa
(1969) 2 SCC 627; (1970) 1 SCR 763; 25 STC 211

Penalty provisions, being penal in nature, require a “guilty mind”; technical or bona fide breaches should not attract penalty even where minimum penalty is prescribed.

Relied upon to set aside penalties; the Court found the assessee’s exclusion of freight was bona fide and therefore not a “false” return.

Court's Reasoning and Analysis

Issue 1 – Freight as part of “sale price”: The Court observed that the statutory definition of “sale price” in Section 2(o) of the MPGST Act is materially identical to Section 2(p) of the Rajasthan Sales Tax Act considered in Hindustan Sugar Mills. Under the Cement Control Order, freight is an integral component of the notified price, and therefore squarely falls within the first limb of the definition. Following Hindustan Sugar Mills, the Court affirmed that freight must be included in the taxable turnover.

Issue 2 – Legality of Penalties: Penalties were imposed on the assertion that the assessee filed “false” returns. The Court reasoned:

The assessee’s exclusion of freight stemmed from a bona fide, arguable interpretation of the statutory definition.

Section 43 MPGST is penal; a “false” return implies deliberateness or culpable negligence. A mere difference in legal interpretation, absent mens rea, does not fulfil this criterion.

Hindustan Steel Ltd. establishes that even mandatory penalty provisions should not be invoked where the breach is technical or based on bona fide belief.

Consequently, the Court concluded that the necessary mens rea was absent and the penalties were unwarranted.

Holding and Implications

HOLDING: The Supreme Court dismissed the appeals concerning freight inclusion but allowed the appeals on the penalty issue, thereby setting aside the penalty orders. No order as to costs was made.

Implications: The judgment reaffirms that, under the Cement Control Order, freight is inseparable from the sale price for sales-tax purposes in Madhya Pradesh and under the CST Act. It simultaneously clarifies that penalty provisions require proof of deliberateness; bona fide interpretative disputes will not attract punitive consequences. While it applies established principles, it underscores taxpayer protections in penalty proceedings without creating new precedent.

Cement Marketing Co. Of India Ltd. v. Assistant Commissioner Of Sales Tax, Indore And Others

P.N Bhagwati, J.— These appeals by special leave raise common questions of law and it would be convenient to dispose them of by a single judgment.

2. The assessee effected certain transactions of sale of cement in accordance with the provisions of the Cement Control Order during the assessment period August 1, 1971 to July 31, 1972 and in the course of the assessment of the assessee to sales tax under the Madhya Pradesh General Sales Tax Act, 1958 and Central Sales Tax Act, 1956, a question arose whether the amount of freight which was included in the “free on rail destination railway station” price, but which was paid by the purchasers and hence deducted from the price shown in the invoices sent to the purchasers, formed part of the sale price so as to be liable to be included in the taxable turnover of the assessee. The assessee, proceeding on the basis that the amount of freight did not form part of the sale price and was not includible in the taxable turnover, did not show it in the returns, but the Assistant Commissioner of Sales Tax took the view that having regard to the provisions of the Cement Control Order, the amount of freight formed part of the sale price and was includible in the taxable turnover of the assessee and on this view, he passed two orders of assessment, one under the Central Sales Tax Act, 1956 and the other under the Madhya Pradesh General Sales Tax Act, 1958, including the amount of freight in the taxable turnover of the assessee and levying tax upon it and also imposing heavy penalty on the assessee on the ground that the assessee had failed to disclose in its returns the amount of freight as forming part of the taxable turnover. The same position obtained also in regard to the assessment period November 15, 1971 to July 31, 1972 and a similar order bringing the amount of freight to tax and imposing heavy penalty on the assessee was passed by the Assistant Commissioner of Sales Tax under the Madhya Pradesh General Sales Tax Act, 1958. Since the question as to whether in respect of transactions of sale of cement governed by the Cement Control Order, the amount of freight formed part of the sale price and was liable to be included in the taxable turnover of the dealer, was pending decision in this Court, the assessee preferred appeals directly to this Court by special leave against the orders of assessment made by the Assistant Commissioner of Sales Tax. The assessee challenged in the appeals not only the inclusion of the amount of freight on the taxable turnover of the assessee, but also the imposition of penalty for not showing the amount of freight as forming part of the taxable turnover in the returns.

3. So far as the first question is concerned, namely, whether the amount of freight formed part of the sale price and was includible in the taxable turnover of the assessee so as to be exigible to sales tax, it stands concluded by a recent decision given by this Court in Hindustan Sugar Mills v. State Of Rajasthan & Others . (1978) 4 SCC 271, (1979) 1 SCR 276. It has been held by this Court in that case that by reason of the provisions of the Cement Control Order, 1967 which governed the transactions of sale of cement entered into by the assessee with the purchasers, the amount of freight formed part of the sale price within the meaning of the first part of the definition of that term contained in Section 2(p) of the Rajasthan Sales Tax Act, 1954 and Section 2(h) of the Central Sales Tax Act, 1956 and was includible in the taxable turnover of the assessee. The definition of “sale price” in Section 2(o) of the Madhya Pradesh General Sales Tax Act, 1958 is materially in the same terms as Section 2(p) of the Rajasthan Sales Tax Act, 1954, and this decision must therefore equally apply under the Madhya Pradesh General Sales Tax Act, 1958 and it must be held that the amount of freight formed part of the sale price within the meaning of the first part of the definition of that term in Section 2(o) of the Madhya Pradesh General Sales Tax Act, 1958 and Section 2(h) of the Central Sales Tax Act, 1956 and was rightly included in the taxable turnover of the assessee.

4. We may point out that the observations made by this Court in the Order dated August 31, 1979 allowing the Review Application of the assessee in Hindustan Sugar Mills case (1978) 4 SCC 271, (1979) 1 SCR 276 are equally applicable in the present case and the State will do what is fair and just to the appellant as indicated by this Court in that order.

5. The next question that arises for consideration is whether the Assistant Commissioner of Sales Tax was right in imposing penalty on the assessee for not showing the amount of freight as forming part of the taxable turnover in its returns. The penalty was imposed under Section 43 of the Madhya Pradesh General Sales Tax Act, 1958 and Section 9 sub-section (2) of the Central Sales Tax Act, 1956 on the ground that the assessee had furnished false returns by not including the amount of freight in the taxable turnover disclosed in the returns. Now it is difficult to see how the assessee could be said to have filed “false” returns, when what the assessee did, namely, not including the amount of freight in the taxable turnover, was under a bona fide belief that the amount of freight did not form part of the sale price and was not includible in the taxable turnover. The contention of the assessee throughout was that on a proper construction of the definition of “sale price” in Section 2(o) of the Madhya Pradesh General Sales Tax Act, 1958 and Section 2(h) of the Central Sales Tax Act, 1956, amount of freight did not fall within the definition and was not liable to be included in the taxable turnover. This was the reason why the assessee did not include the amount of freight in the taxable turnover in the returns filed by it. Now, it cannot be said that this was a frivolous contention taken up merely for the purpose of avoiding liability to pay tax. It was a highly arguable contention which required serious consideration by the Court and the belief entertained by the assessee that it was not liable to include the amount of freight in the taxable turnover could not be said to be mala fide or unreasonable. What Section 43 of the Madhya Pradesh General Sales Tax Act, 1958 requires is that the assessee should have filed a “false” return and a return cannot be said to be ‘false’ unless there is an element of deliberateness in it. It is possible that even where the incorrectness of the return is claimed to be due to want of care on the part of the assessee and there is no reasonable explanation forthcoming from the assessee for such want of care, the Court may, in a given case, infer deliberations and the return may be liable to be branded as a false return. But where the assessee does not include a particular Item in the taxable turnover under a bona fide belief that he is not liable so to include it, it would not be right to condemn the return as a “false” return inviting imposition of penalty. This view which is being taken by us is supported by the decision of this Court in Hindustan Steel Ltd. v. State Of Orissa . (1969) 2 SCC 627, (1970) 1 SCR 763, (1970) 25 STC 211 where it has been held that “even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute....” It is elementary that Section 43 of the Madhya Pradesh General Sales Tax Act, 1958 providing for imposition of penalty is penal in character and unless the filing of an inaccurate return is accompanied by a guilty mind, the section cannot be invoked for imposing penalty. If the view canvassed on behalf of the Revenue were accepted, the result would be that even if the assessee raises a bona fide contention that a particular Item is not liable to be included in the taxable turnover, he would have to show it as forming part of the taxable turnover in his return and pay tax upon it on pain of being held liable for penalty in case his contention is ultimately found by the Court to be not acceptable. That surely could never have been intended by the legislature.

6. We are, therefore, of the view that the assessee could not be said to have filed “false” returns when it did not include the amount of freight in the taxable turnover shown in the returns and the Assistant Commissioner of Sales Tax was not justified in imposing penalty on the assessee under Section 43 of the Madhya Pradesh General Sales Tax, 1958 and Section 9, sub-section (2) of the Central Sales Tax Act, 1956.

7. We accordingly reject the appeals insofar they are directed against the inclusion of the amount of freight in the taxable turnover of the assessee but allow the appeals insofar as they relate to imposition of penalty and set aside the orders passed by the Assistant Commissioner of Sales Tax imposing penalty on the assessee.

8. There will be no order as to costs of the appeals.

Civil Appeals Nos. 191-193 of 1978, decided on October 30, 1979.

Cement Marketing Co. Of India Ltd. v. Assistant Commissioner Of Sales Tax, Indore And Others

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Cement Marketing Co. Of India Ltd. v. Assistant Commissioner Of Sales Tax, Indore And Others

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